Tax cut hopes fade as UK’s debt interest bill rockets

Britain’s soaring debt interest bill looks set to extinguish any flickering prospect of significant pre-Election tax cuts, economists have warned.

Hopes that Chancellor Jeremy Hunt may have some room for big giveaways rose last week when public borrowing figures came in at less than expected.

But rising interest rate expectations and higher yields on UK Government bonds, known as gilts, suggest the cost of servicing the Government’s huge debt pile over the next five years could be up to £150 billion more than previously thought, according to analysis by Pantheon Macroeconomics.

Such a steep rise in borrowing costs would wipe out what little headroom Hunt has if he is to meet his target of debt falling as a proportion of economic output in the next five years. Sticking with this plan is key to keeping financial markets calm, experts say.

‘The turmoil following the mini-Budget last autumn suggests markets are likely to be less willing to tolerate plans that aren’t credible, especially given the economic backdrop,’ said Samuel Tombs, Pantheon’s chief UK economist. ‘We are confident in our assumption the Chancellor will not announce significant tax cuts later this year.’

Under pressure: Prime Minister Rishi Sunak and Chancellor Jeremy Hunt

The sober analysis is likely to dampen hopes for tax cuts sparked by last week’s better-than-expected public sector finance figures.

They showed that Government borrowing for the first four months of the financial year – April to July – was £56.6 billion. That is £11.3 billion less than had been expected by the Office for Budget Responsibility, the fiscal watchdog, in March.

But there were also unwanted surprises in the detail. Spending was swollen by public sector pay agreements as the Government sought to end damaging strikes.

And interest payments on the Government’s £2.6 trillion debt pile were higher than expected. That is partly because the rate paid on some of the debt is linked to inflation, which has not fallen as fast as hoped. It means debt interest spending for the financial year to date has been £37.8 billion – £1.9 billion more than the OBR expected in March.

Last year debt interest spending totalled almost £107 billion, and it is predicted to reach a still-staggering £94 billion in this fiscal year.

Overall, the picture for public finances for this year looks healthier than before, but the longer-term picture is more troubling. Tombs said that, on the latest data, the OBR would have to revise its forecast for debt interest payments in each of the next five years.

He said it would have to raise it by about £40 billion in the next fiscal year (2024-25) and by £20 billion in five years’ time, with the total over five years up by £150 billion.

The worse-than-expected outlook is challenging for Hunt because the OBR reckons that – to hit his debt target – he has only £6.5 billion of fiscal headroom to play with. This is the smallest margin since the watchdog was set up 13 years ago.

Ruth Gregory at Capital Economics said: ‘We think Hunt will have little room to unveil large, permanent tax cuts and/or spending rises in the Autumn Statement without jeopardising his fiscal rules.’

He is under pressure to scrap tourist and inheritance tax and cut corporation tax. But he is understood to prefer firing up growth through pension fund reform, unlocking £50 billion of investment in UK tech and infrastructure.

This post first appeared on Dailymail.co.uk